The past several months has seen the Chinese stock market on a roller coaster ride. First there were steep (record) increases in the market, followed by a huge sell off in the past 3 weeks.
The Chinese government's introduction of new measures to restore confidence in the market has not stopped investors from dumping stocks and Chinese bonds overseas.
The stock market index has falling 32.1% since its high in mid-June.
This resembles the dot-com bubble burst in the US in the 1990’s. It took years for US markets to recover from the dot-com bubble. It stalled the US economy and lowered real estate values.
The losses in China have spilled over into the US markets. It could potentially leads to slower global growth and lower earnings growth for US companies doing business in Asia. Investors in the US are paying attention to developments in China and Greece.
As we’ve seen in the US following down cycles, the combination of public market discipline and low interest rates have allowed US markets to recover.
If these challenges are properly addressed, the stock market will regain its confidence.
In the longer run, Chinese growth will continue and we should not be surprised that there will be a strong recovery following such a steep downturn.
It is important that the panic we are seeing is stopped by the implementation of strong measures by the Chinese government to shore up its slowing economy.